Global food prices have spiked 60 percent since the beginning of 2007, sparking riots in more than 30 countries that depend on imported food, including Cameroon and Egypt. The surge in prices threatens to push the number of malnourished people in the world from 860 million to almost 1 billion, according to the World Food Programme in Rome.

Leaders of developing nations including the Philippines, Gambia and El Salvador now say the only way to nourish their people is to grow more food themselves rather than rely on cheap imports. The backlash may sink global trade talks, reduce the almost $1 trillion in annual food trade and lead to the return of high agricultural tariffs and subsidies around the world.”

Firstly, trade in agricultural products has always been the least ‘free’. Tariffs and subsidies are still rampant the world over. For example, in Japan nearly all imports of cheap foreign rice from countries like China and America are blocked. The government then pays the farmers at least four times the market value for rice and then sells it into the market at a loss. So to rage about free food trade policies being responsible for shortages and price spikes is just absurd.

Second, a free market will match supply and demand up at any given moment in time. Granted, the market clearing price might be anything but pleasant, but to say that “…countries in Africa, Asia and Latin America find they can't buy enough food to feed their people” is ignorant. What is really meant in that complaint is that these countries can’t purchase enough food at LOW prices. They can’t or don’t want to pay the market clearing price. Since they are poor or developing countries it is entirely possible that they do not have the economic resources to pay for expensive food imports. That is an entirely different and separate matter.

Third, to say that “the idea of trade liberalization was that you could count on global markets, but they're not proving reliable” is also ignorant. The global markets are completely reliable. The supply is there. The real issue is at what price. That statement also implies that somehow tariffs and subsidies would prove reliable. That is something only the economically illiterate could believe. Tariffs reduce or prevent imports. Subsidies reduce or prevent exports. These policies completely discourage trade and do not address the problems of nations that must import food.

Finally, the most important point here is that the free market price is a valuable signal. Price is THE MOTHER OF ALL SIGNALS. For the first time, in what I can only guess to be several generations, farmers are actually able to earn a respectable living. These prices make it possible for farmers to plant more and invest more in productivity enhancing technologies and equipment. That is exactly what they will do. The profit motive will encourage them to do so.

These higher agricultural prices will result in other VERY important benefits. These are called economic externalities. For example, now that there is money to be made in agriculture, farm land will increase, or has increased, in value. The free market has made it less likely that productive farmland will be converted into residential real estate as the opportunity cost of doing so has now increased. The long run benefit of being able to make a normal economic profit (This is an important term, not likely to mean what you think it means. Follow the link, look it up) in agriculture means that non-agricultural development will emphasize non-productive or marginally productive agricultural lands. This is an important shift for all of humanity away from buliding our greatest cities on the most fertile of farmland.

I would actually argue that prices have been ARTIFICIALLY low. By my definitions and understanding of economics, if producers can’t make a normal economic profit, then the market price is too low. Since that would normally dissuade these producers from producing (by exiting the business for example), prices would rise as supply is withdrawn. That this did not happen for generations is the result of massive global tariff and subsidy policies.

As explained by Raj Patel in Stuffed and Starved, there are very real problems in the food supply and distribution chain that are the real culprits. It is because of these problem that market prices are being unduly influenced. Clear these bottle necks out and the entire landscape would change for the better...

Great post. It's simply amazing that the same "tried and false" methods of price controls continue to be pushed not only as if they're true but as if they're actually new. Sadly, populaces the world over will buy into them, just as they always have.

The general populace, and I'm not talking about undeducated idiots here, tend to vote themselve into poverty because they don't know any better.

For example, my education and experience is in the field of economics and trading. I would not ever DREAM of telling a brain surgeon what to do.

BUT, every single day carpenters, farmers, and dentists rage, protest and vote for economic policies that they have no realistic hope of understanding because it is completely and utterly outside their domain of expertise.

It really is as absurb as me demanding that I have the insight to legislate best practicies for brain surgeons... and to micro manage their daily routines.

if producers can’t make a normal economic profit, then the market price is too low

What a bizarre statement. If producers can't make a profit, perhaps they should get out of that business and into another.

And I'm struck by the fact that everyone here seems to think economists actually have special knowledge enabling them to fix complicated problems that no one else can. Isn't the Fed run by ... economists? Yet we seem to be having a mortgage meltdown that's rippling throughout our entire economy.

Finally, I'm not willing to let people starve for economic principles, not even in the short term. Americans find it easy to bloviate on such abstractions because their own refrigerators are full.

You don't seem to understand what is going on here. This is not an economic problem, and it has nothing to do with economic policies (or not much anyway). The reason there are food shortages is that there are simultaneous widespread crop failures. The Asian rice fields are failing, the midwest corn fields are flooded, the middle eastern wheat crops are being killed by mold (or maybe fungus, I don't remember exactly). The problem isn't just that prices are higher than what many people can afford, it is that there probably won't actually be enough food this year to feed everyone. The market's solution to this is to raise prices to ration food so that the rich will eat and the poor will starve. Many view this as unfair, but food has to be rationed in some manner when there isn't enough.

There are no economic policies that will prevent nature from destroying crops now and then. The benefit of encouraging local food production is that your country will have food when there are widespread crop failures, so you can hoard it for yourself. Countries that are relying on food imports right now might find that there is no market clearing price they can buy food at, because someone is going to starve and no amount of money is worth starving for.

Nothing wrong with your logic, Ben, or the notion that food prices were too low for an extended period of time. But, the last time this happened, the long term effects were disastrous for farming. During the 1970's food spike, farmers did invest borrowed money in new technology, what was at that time giant tractors with glass cabs and air conditioners, and the like. But when it came unglued, it not only ushered in a generation of misery in Saskatchewan, but took down a multinational maker of farm machinery located in your home town. All that's left of it is Massey Street.

“Free-trade policies long advanced by World Bank President Robert Zoellick and U.S. President George W. Bush are losing favor as countries in Africa, Asia and Latin America find they can't buy enough food to feed their people."

The blog post and all comments so far fail to acknowledge the REAL problem - too much population! These countries need to stop breeding like rabbits, plain and simple. Then they may have enough food without depending on other countries to subsidize their excessive populations.

Reducing birth rates in 3rd world countries will have added benefits, such as making it easier to educate their populations and likely increasing daily wages, as there will less competition for the available jobs.

But instead, the world approaches this problem just as we have with say, oil/energy. Give us ever more, sigh.

Disclaimer

The Financial Ninja is a collection of my thoughts and opinions about current economic and market conditions. These are not buy and sell recommendations. Use your head and do your own research. This is a forum to stimulate discussion and debate.

About Me

I started trading during the tech bubble when I was still in high school. My trading has financed my education and I have since completed a BA in Economics and an MBA with a concentration in Finance. I have worked as both a proprietary equity and fixed income derivatives trader.